ECB evidence of climate risk premiums

July 22, 2022|Written by |Central Bank of Iraq, Bank of Japan, Banque de France, European Central Bank, Federal Reserve

An ECB study reveals climate risk premiums for equity markets, green loans from the Central Bank of Iraq, the San Francisco Fed on the US megadrought and more from this week in green central banking.

Text analysis shows climate risk premiums for equity markets

A novel European Central Bank analysis of Reuters news stories has found climate risk premiums in euro area equity markets, with firm-level information being used to gauge transition risk.

The study introduces two new climate risk indicators based on a text analysis. Scientific texts on climate change were used to build vocabularies associated with climate risks, which were then compared against a collection of Reuters news stories to create indices for physical and transition risks.

These indices were then used to look for climate risk premiums in euro area equity markets. The results show there have been  climate risk premiums since 2015, with investors requiring a relatively higher return from stocks providing a bad hedge against climate risk.

Central Bank of Iraq offers green loans

Despite Iraq’s reliance on revenues from oil exports, the country’s central bank is deeply concerned about the impact of climate change on the Iraqi economy, according to the bank’s  director general.

In an article published by the Official Monetary and Financial Institutions Forum, an independent central banking network, Mazen Sabah Ahmed said Iraq is experiencing drought, water shortages and temperatures hitting record highs exceeding 50ºC. The Iraqi central bank estimates that these trends could result in a decrease of Iraq’s real gross domestic product (GDP) by 4%, regardless of any gains caused by higher oil prices.

“The significant risks posed by climate change have pushed the central bank to take urgent action,” Ahmed said, outlining an ongoing Central Bank of Iraq programme that offers low interest and eased-term loans for water, green and renewable energy projects.

San Francisco Fed outlines effects of drought

The Federal Reserve Bank of San Francisco has published an overview of the severe drought conditions affecting its district, now experiencing its worst drought in at least 1,200 years.

Written by Elizabeth Lawson-Kurdy, communications lead for supervision and credit, the article outlines the wildfires and water shortages being experienced as a result of the two-decade-long drought, along with the consequences for businesses and the banks that service them. The San Francisco Fed is responsible for one of the twelve districts, comprising California and eight other US western states, that make up the US Federal Reserve system.

Published in the regional Fed’s blog, the article was accompanied by a strong statement of commitment to a climate response. “At the San Francisco Fed, we are students of the economy. We monitor ongoing and future risks to the economy, including climate risk,” the statement said.

“The economic impacts of a changing climate – including the frequency and magnitude of severe weather events – affect each of our three core responsibilities: conducting monetary policy, regulating and supervising the banking system, and ensuring a safe and sound payment system.”

G20 central bank governors discuss climate

G20 finance ministers and central bank governors have held a high-level breakfast discussion on climate mitigation as part of a series of meetings in Bali hosted by Indonesia, which currently holds the G20 presidency.

Summarised in a press statement, the meeting was a hybrid event attended by all G20 members, including Russia despite current tensions over the Ukraine invasion. The meeting built on discussions being held in the G20’s sustainable finance working group, tasked with overcoming institutional and market barriers to sustainable finance and contributing to alignment of the international financial system with the Paris Agreement.

Participants presented their ongoing and planned climate policies to address climate change, focusing on public policy levers and mixes to “provide better market signals, steer sustainable investment decisions and incentivise the participation of public and private capital in sustainable investments”.

Banque de France reviews green bond market

A recent Banque de France blog post has reviewed the rapid growth of the green bond market and growing evidence for a “greenium”, indicating that these instruments and markets have become successfully established.

Since the first green bond was issued in 2007, the market for them has soared to €467bn in 2021, around 5% of total global bond issues for the year. The euro area issued a total of €185bnin green bonds during 2021, accounting for 39% of the global market. In contrast, China issued €68bn, the US €45bn, and the UK €28bn.

New major institutional issuers have given the green bond market “depth and appeal”, the writers say, with the UK, Italian and Spanish treasuries issuing their first green bonds in 2021. However, the challenge of greenwashing in the absence of a binding regulatory framework remains a serious challenge, they add, pointing to the development of the European green bond standard and taxonomy.

Second auction in BoJ green loan scheme

The Bank of Japan (BoJ) has conducted the second auction in its green loans scheme, disbursing the equivalent of US$11.57bn in interest free loans to financial institutions contributing to projects addressing climate change.

In order to access the scheme, borrowers are required to disclose information based on the recommendations of the Taskforce on Climate-related Financial Disclosures, as well as the criteria they have used to determine which investment or loans contribute to addressing climate change.

However, specific allocation decisions are left to the discretion of the institutions themselves. Combined with the BoJ’s inaugural auction in January, this brings the total of loans made under the scheme to over US$26bn at current market rates.

This page was last updated July 22, 2022

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